Iran War Threatens Irish Economic Outlook
A potential escalation of the conflict in Iran poses a significant risk to the Irish economy, potentially pushing inflation above 4% in 2026, according to the Central Bank of Ireland. The bank’s latest economic forecast warns of eroding household incomes due to rising fuel prices and a slowdown in economic growth.
Inflation Projections Revised Upward
The Central Bank has revised its inflation projection for 2026 to 2.9%, with a “severe scenario” projecting inflation reaching 4.2% this year and remaining at 4% in 2027. The Journal reports that the extent of these effects hinges on the duration and intensity of the conflict and any damage to critical infrastructure in the Middle East.
Economic Growth to Slow
Domestic growth is expected to slow to 2.9% in 2026, down from 4.9% in 2025. This slowdown, coupled with inflationary pressures, is creating a challenging economic environment for Ireland, which is highly sensitive to global developments.
Government Fiscal Space Limited
The Central Bank also cautioned that the Irish government’s ability to respond to the economic fallout from the Iran war may be constrained. The underlying deficit, excluding volatile multinational corporation tax receipts, is projected to double by 2028 as government spending outpaces revenue. This limited fiscal space means the government has less flexibility to implement support measures.
Targeted Support for Vulnerable Households
The Central Bank recommends that the government focus on “targeted, temporary and tailored measures” to support the most vulnerable households. The government has a contingency fund of approximately €1 billion, and any cost-of-living package will necessitate to be carefully designed to maximize its impact.
Unemployment Expected to Rise
The economic slowdown is expected to lead to a gradual increase in unemployment, rising to just above 5% as the economy grows at a slower pace.
Housing Market Remains Robust
Despite the broader economic challenges, the housing market is expected to remain relatively strong, with home completions projected to reach 40,000 in 2026, increasing to 43,000 in 2027 and 46,000 in 2028. However, this growth is contingent on the delivery of necessary public infrastructure.
Broader Central Bank Concerns
The situation in Iran is adding to concerns among central banks globally. Bloomberg reports that central bank chiefs in Australia and New Zealand are grappling with how to respond to inflationary pressures stemming from the conflict. The US Federal Reserve has also held interest rates steady amid rising oil prices and economic uncertainty, as reported by the BBC, with future rate cuts dependent on inflation trends.
Bond Market Volatility
The conflict is also impacting bond markets, with Europe’s sovereign bonds facing a “perfect storm” of rising inflation and shifting central bank policies. CNBC notes that yields on UK Gilts have surged to a 52-week high, and similar trends are being observed across the continent.
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